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Policy overhang keeps Philippine stocks in check
Publication Date : 22-08-2013
For the most part, the local bourse has been able to leverage off the strengths of the Philippine government on and translate these to gains for thousands of investors, both domestic and foreign.
However, the benefits brought by the change of leadership in the country three years ago has also caused some uncertainty in certain sectors of the stock market, as the government tried to correct what it believes were its past errors when dealing with private corporations.
In particular, efforts are being made to either correct or revise terms of contracts or long-held practices of taxation which are now causing a negative overhang on some stocks traded on the Philippine Stock Exchange.
Tax on mining
Of these, the longest-running debate, so far, is the issue of proposed reforms on mining taxes. Simply put, the government wants to raise its share of revenues from the mining sector from the present level of a 2-per cent excise tax, which President Benigno Aquino III says is too small, given what he believes are risks posed by the industry to the environment.
The Aquino administration is batting for a revenue sharing deal with mining firms of as much as 50 per cent of their total revenues—a level that mining firms believe is unreasonably high.
Led by the Chamber of Mines of the Philippines—many of whose members are listed on the PSE—mining firms say that the local revenue sharing regime with the government is already one of the highest in the world.
In 2011, despite the absence of a clear government policy on the industry, the mining sector contributed an estimated 300 billion pesos (US$6.7 billion), both directly and indirectly, to the Philippine economy, comprising 3.3 per cent of the country’s gross domestic product.
Mining firms say they can contribute a lot more, given the estimated $840 billion in mineral deposits in the country—one of the richest concentrations in the world—in the form of gold, copper, nickel, chromite, manganese, iron and silver.
Little progress has been made in finding a middle ground between the government and the mining industry, despite the sector having been made a priority investment sector by the Aquino administration.
The latest proposal from the government calls for a 7-per cent tax on gross revenues, plus a 50-50 revenue sharing after that—something that the industry is not amenable to.
Ultimately, the mining revenue sharing scheme will have to be passed by Congress, which has not yet begun to deliberate on the matter.
Because of policy overhang, gains in mining stocks have largely been capped, resulting in the PSE’s mining and oil sector having a market capitalisation of only 105.1 billion pesos, making it the smallest industry in the 10.1-trillion peso bourse.
Tax on gaming
Another policy overhang that is affecting local stocks is the recent tax dispute between the Philippine Amusement and Gaming Corp. (and by extension, gaming stocks listed on the PSE) and the Bureau of Internal Revenue.
Last April, the BIR ruled that all earnings of the state-run gaming regulator and operator are subject to corporate income tax, following a Supreme Court decision in 2011 that affirmed the removal of Pagcor’s income tax exemption under the Expanded Value Added Tax Law.
According to the BIR circular, the new tax imposition covered licensed private casinos, the bulk of which are being built in Pagcor’s US$4-billion Entertainment City complex in Pasay City.
Unfortunately, the original business plans made by the four locators in the project—Bloomberry Resorts, Melco Crown, Resorts World and Universal Entertainment—were premised on the tax exemption in question.
The unclear policy has dampened sentiment on local gaming stocks, but for BIR Commissioner Kim Henares, no ambiguity exists.
“As far as I’m concerned, the issue has been resolved,” she said in a telephone interview. “We are only implementing the law that has been affirmed by the Supreme Court.”
Pagcor, however, is still appealing for a softer interpretation of the law, and it remains unclear whether the tax bureau—pressured to raise more revenues to fund the government’s operations—will yield.
The most recent policy overhang, however, has to do with the income tax paid by Metro Manila’s water firms—Manila Water Company Inc. and Maynilad Water Services Inc.—as part of their concession agreement with the government entered into in the 1990s.
Ayala-controlled Manila Water is listed on the PSE, while Maynilad is a major operating unit of publicly listed Metro Pacific Investments Corp. of the PLDT group.
It recently came to light that both firms were passing on to consumers their corporate income tax burden—a practice that had been allowed by their regulator, Manila Waterworks Sewerage System through the years.
With the recent revelation, however, MWSS has made an about-face and has criticised the practice of both firms, with some government officials now calling for a revision in the terms of their contracts.
Business groups have come to the aid of the two water firms, decrying what they believe is a clear case of policy inconsistency on the part of the government.
“But just because it was done in the past doesn’t make it right,” one government official said in an interview, requesting anonymity. The official explained that both firms are allowed by regulators a fixed rate of return on their investments, and the passing on of their income tax burdens to consumers means the firms are actually exceeding the cap on these returns.
To date, it remains unclear whether the water firms’ contracts will be tightened or whether they will be ordered to refund what the government now believes is the excess revenues they have kept for the last 16 years.